Bharat Forge cracks the art of profitably managing a cyclical business

The company has shown remarkable recovery in the past four years by increasing exposure to non-auto businesses. It particularly benefited from supplying equipment for shale oil drilling.Ashutosh Shyam | ET Bureau | November 28, 2016, 13:43 IST

Bharat Forge, India's largest forging company, appears to have learnt the art of profitably managing a cyclical business even during periods of slow economic growth. After the financial crisis of 2008 affected commercial vehicle sales in developed countries, Bharat Forge adopted a lean cost structure and focused on adding new sources of revenue to drive growth over the long term.

The company has shown remarkable recovery in the past four years by increasing exposure to non-auto businesses. It particularly benefited from supplying equipment for shale oil drilling. This helped in reducing high reliance on global truck makers.

The combined impact of high margin from non-auto revenue, lower break-even level and rising share of sales of its value-added products has helped the company deliver nearly 30% operating profit margin in FY16.

Although, the medium-term growth for the company looks subdued on the back of declining truck orders from North America and uncertainty over shale oil investments in the near term due to lower crude oil price, the company continues to invest in promising revenue streams.

Bharat Forge is investing in segments such as aerospace, railways and defence. Also, in the existing business, the company is transforming itself into a powertrain solution provider to electric vehicles. To further reduce exposure to the cyclicality of the truck business, the company is gradually increasing exposure to the passenger car market. The share of this segment is likely to improve to 15% in the next few years from 5% now.

The company has invested close to Rs 35 crore in its R&D facility, which is expected to increase to Rs 100 crore as growth from new sectors becomes visible. The R&D facility of the company is among the very few facilities approved by the government. It holds 32 patents and plans to file another 15-20 in the near future.

Bharat Forge expects revenue from the aerospace, railways and defence sectors to reach $100 million each over the next few years. It has bagged an order for supplying flat track for Boeing's 737 Max and 777 jets.

Bharat Forge is the first Indian company to have received an NADCAP certification for aerospace applications. NADCAP is a global accreditation programme for aerospace engineering, defence and related industries. Given the stringent quality norms and long qualification timelines, the aerospace segment is known as a 'difficult-to-enter but sticky' space for suppliers.

Supplying for defence-related equipment, too, is turning into a big opportunity. The company has started investing in new and complex technologies to be able to manufacture forging parts used in the defence segment. In the domestic market, new orders for 4,000 guns are up for grabs in the next 10-15 years, with each order worth Rs 12-14 crore.

Bharat Forge is adopting a three-pronged approach to participate in the artillery business - capture the new gun requirement for future needs; substitute 75-90% of imports on the current platforms and offer consumable parts for the artillery business. The company has defence joint ventures with three companies - two Israeli firms and Swedish defence major SAAB. Bharat Forge plans to look at more partnerships to expand its footprint.

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In 2018, automobile demand remained robust despite the slowdown overcast in the last three months of year. All segments reported strong double-digit growth in the calendar year ending December 31 except passenger vehicles which reported a growth of 5 per cent. Three-wheelers sales grew fastest followed by commercial vehicles, two-wheelers, and passenger vehicles. The overall automobile sales crossed 26.7 million units for the first time.

In 2018, automobile demand remained robust despite the slowdown overcast in the last three months of year. All segments reported strong double-digit growth in the calendar year ending December 31 except passenger vehicles which reported a growth of 5 per cent. Three-wheelers sales grew fastest followed by commercial vehicles, two-wheelers, and passenger vehicles. The overall automobile sales crossed 26.7 million units for the first time.